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M A Y 1964

State Government

The financial activities of State governments exert
a continuing and substantial influence on the
economy. States daily perform many governmental
functions for individuals and business units and also
assist in financing m any of the functions of local gov­
ernments. Total State expenditures are currently
running close to $40 billion, or over three fourths of
Federal expenditures exclusive of national defense.
F urther, State expenditures have been increasing
steadily and somewhat more rapidly than Federal
o u tlays; the total increase from 1950 to 1962 was
170% for States and 122% for the Federal Gov­
This is a brief look at State expenditures. Con­
sideration is lim ited to general expenditures, which
exclude the spendings of business-type enterprises
(such as utilities and liquor stores) and of insurancetrust operations (such as retirem ent system s). The
analysis covers the 12-year period 1950-1962, which
is perhaps representative of the whole postwar period.
A ll data are from the Governments Division of the
U. S. Bureau of the Census and are for fiscal years,
which usually end on Jun e 30. Special attention is
given to the States of the Fifth Federal Reserve Dis­
trict, om itting the D istrict of Columbia since it is
not in any State. Figures for A laska are included
beginning in 1959 and for H aw aii beginning in 1960.
No adjustm ents were made for the introduction of
these two units because their totals were not large
enough to affect appreciably the trends or the con­
clusions given below.
Digitized for2

Total Expenditures S ta rtin g from $11.6 billio n
in 1950, general expenditures of all State govern­
ments by 1962 had reached nearly $31.3 billion. This
was an increase of 170% , or an average annual in­
crement of 8.9% . D uring the same period GNP rose
about 95% , or at an annual rate of 5.1% . The in­
crease in expenditures was fairly evenly spread over
the period except that the rise was quite slow during
the Korean W ar.
In 1950 State expenditures ranged from a low of
$21.5 million in N evada to a high of $1,375 million
in New York. California was second highest and
was the only other State with spendings above $1
billion. At the other extrem e, there were 15 States
with totals below $100 million.
B y 1962 the range was from a low of $92.8 million
to a high of $3,705 million. Nevada was still the
low State and only two others were below the $100
million m ark— New H am pshire and Vermont. C ali­
fornia was top State and w as joined by six others
in the billion-dollar class—-Illinois, M ichigan, New
York, Ohio, Pennsylvania, and T exas.
Total expenditures for the five States of the Fifth
District rose from $962 million in 1950 to $2,574
million in 1962. T his was an increase of 168%—
almost the same as for all States. The range in the
D istrict was much sm aller than in the nation largely
because the Fifth D istrict States are more nearly uni­
form in size, population, and income. The District
range in 1950 was from $130.8 million in South
Carolina to $303.6 million in North Carolina. From
1950 to 1962 North C arolina had the second lowest
rate of increase, 145% , but nevertheless retained top


D ollars

position w ith total spendings of $745.2 million in
1962. W est V irgin ia had the lowest rate of increase,
114%, and displaced South Carolina as low State
with a total of $320.4 million. M aryland recorded
the largest relative growth, 215% , but still finished
in third position with $572.1 million, close behind
V irg in ia’s $591.3 million.
Not all the expenditures were made directly by the
S ta te s; a substantial amount was paid out as grants
or subsidies to local governments. For the country
as a whole, such aid rose from $4.0 billion in 1950
to $10.9 billion in 1962. In each year the amount
was slightly more than a third of total expenditures.
Expenditures for schools, welfare, and highw ays ac­
counted for over 80% of all State aid. In the Fifth
D istrict States the story was much the same except
that State aid payments grew more rapidly than the
total, risin g from $331 million in 1950 to $936 million
in 1962. A s a result of this 181% gain, aid p ay­
ments rose from 34.5% of total expenditures in 1950
to 37.4% in 1962.
Reflecting larger increases in spending than in
revenues, gross debt of all States rose from $5.3 bil­
lion in 1950 to almost $22 billion in 1962. The 1950
figure was about half of general expenditures for that
year, while the corresponding ratio for 1962 was
slightly over two thirds. The combined debt for the
Fifth D istrict States in this period rose from $512
million to $1,743 million, or somewhat less, pro­
portionally, than in all States.
Per Capita Expenditures S ta te s differ sh arp ly
in physical size, terrain, population, income, and in

the division of governmental functions between State
and local governments. For this reason interstate
comparisons of total State expenditures are practi­
cally meaningless. If, however, expenditures are re­
duced to a per capita basis some significant com­
parisons can be made.
Nationwide, per capita State expenditures rose
from $76.97 in 1950 to $168.96 in 1962, an increase
of 119.5%. T hey ranged between $54.48 and
$161.98 in 1950, and between $110.47 and $423.99 in
1962. The top States in the earlier year were, in
descending order, W ashington, North Dakota, Lou­
isiana, W yom ing, and Nevada, and their median
figure was $140.58. The low States were, in ascend­
ing order, New Jersey, Kentucky, Georgia, T exas,
and Alabama. T heir median figure was $60.73, or
considerably less than half that for the high States.
B y 1962 the two newest States—A laska and H a­
w aii—had taken the lead in per capita expenditures.
A laska’s high figure is due in part to its low popula­
tion density, which alw ays makes for high per capita
expenses. In both States, the structure of local gov­
ernment has not been fully developed, with the con­
sequence that the State governments perform func­
tions undertaken by localities elsewhere.
The per capita figure in 1962 was $423.99 for
A laska and $313.55 for H aw aii. The next highest
States, in order, were W yom ing, Nevada, and Lou­
isiana. The median of these high States was $283.69.
New Je rsey still occupied the bottom position with
$110.47 and other low States were, in ascending
order, Ohio, Illinois, Florida, and T exas. The
median for these States was $131.55, again less than

half the figure for the high States. A notable de­
velopment here was that two Southern States moved
out of the low group and were replaced by two M id­
western States.
In the Fifth D istrict States, average per capita
expenditures rose from $69.29, or 90% of the U. S.
average, in 1950 to $157.87, or over 93% of the U . S.
average in 1962. The absolute difference between
the D istrict and the national averages, however, in­
creased from $8 to $11 over the period. The chart at
the right on page 3 show’s the behavior of these two
averages. The spread within the D istrict was fairly
narrow —from $59.15 to $77.21 in 1950 and from
$141.56 to $180.73 in 1962. M aryland led the Dis­
trict in 1950 but by 1962 W est V irgin ia had gone
ahead, due in large part to a decline in population.
The other States retained their same order, with
North C arolina third, South Carolina fourth, and
V irgin ia fifth.
A brief exam ination of the structure of per capita
expenditures in the different groups of States affords
some understanding of w hy their totals differ. The
following table shows average per capita expenditures
for certain m ajor functions in different State group­
ings for 1962. The figures are unweighted averages

Digitized for 4

of per capita exp enditures; the high and low States
are those identified above.
H ighw ays
Public W elfare
N atural Resources



A verage






u. s.

Two patterns in the figures are noteworthy. F irst,
except for public w elfare, the figures for the high
States approxim ate or exceed twice the corresponding figures for the low States. Second, again ex ­
cepting public w elfare, the figures for the Fifth Dis­
trict States are close to, and only slightly below, the
U. S. average.
Ratio of Expenditures to Personal Income D ata
on personal income perm it further significant inter­
state comparisons. The ratio of expenditures to the
personal income received in a State is a useful m eas­
ure of the burden of those expenditures to the people
of that State.
For the nation, the ratio of State government ex ­
penditures to personal income in the early years of
the period fluctuated between 5.5% and 6.0% . The
figure w as relatively low in 1952 and 1953, perhaps
because of curtailm ent of State activities during the
Korean W ar. A fter 1954 the ratio rose steadily,
reaching 7.6% in 1962. The chart on this page
shows the averages for both the U. S. and the Fifth
District States.
In 1950 the ratio ranged from 2.3% in New Jersey
to 11.4% in Louisiana. The States w ith the highest
ratios were Louisiana, Oklahoma, North Dakota, New
M exico, and W ashington, with a median figure of
9.7% . The low States w7
ere New Jersey, Illinois,
New Y ork, Connecticut, N ebraska, and Ohio, and
their median was 3.9% . B y 1962 the range was
higher and w ider, from 3.8% in New Je rsey to 15.9%
in A laska. In the high group wrere the two newest
States plus Louisiana, M ississippi, New M exico, and
W yom ing. T heir median w as 13.6% . The low
group, w ith a median of 5.4% , w as composed of New
Jersey, Illinois, Ohio, N ebraska, and M assachusetts.
The average ratio for the Fifth D istrict States w as
consistently above the U . S. average. The difference
fluctuated from as little as one-half point to as much
as a point and a half. Thus, in the D istrict the
burden of State expenditures was somewhat heavier
than in the country as a whole. W ith in the District,
M aryland consistently had the lowest ratio of ex ­
penditures to personal income, while V irgin ia had
the second lowest. M arylan d’s ratio did not exceed
6% until 1956 and did not pass 7% until 1962. For

the period as a whole, South Carolina had the highest
ratio. Its ratio was 10% or higher in five of the years
and reached a peak of 10.6% in 1959. North Caro­
lin a’s ratio was second h ig h e st; in no year did it touch
10%, but in several years it was barely below this
figure. W est V irg in ia was in the middle position
most of the time but in the final three years its ratio
rose sharply from 8.8% to 10.3% to take the lead
in the District.
Expenditures by M ajor Functions E xp en d itu res
for all functions have increased, but much more for
some functions than for others. A functional analysis
of the data shows the changing importance of dif­
ferent activities. The percentage distribution of gen­
eral expenditures by m ajor functions in 1950 and
1962 is given in the chart on this page.
F or all States, education rose steadily and sub­
stantially in importance, moving from 26.6% to
34.3% of the total. H ighw ay expenditures increased
only moderately, from 22.3% to 25.5% .
Su rp ris­
ingly, the relative importance of public welfare fell
significantly, from 20.4% to 13.7%. Expenditures
for health and hospitals showed a somewhat sm aller
relative decline. Interest on debt, while not a m ajor
expenditure, increased two and a half times in rela­
tive importance, risin g from 0.8% to 2.0% . Educa­
tion, highw ays, and public welfare account for nearly
three fourths of all general expenditures.
Trends in spending patterns in D istrict States were
somewhat different. In 1950 expenditures for edu­
cation were relatively much more important in the
District than in all States—34.6% compared with
26.6% . These rose only moderately but were still
above the U. S. average in 1962. H ighw ay expendi­
tures in the D istrict declined in relative importance,
from 30.6% to 26.4% , while in the nation they in­
creased moderately. This m ay have been because Dis­
trict States took an early lead in highw ay program s
and also in recent years have placed less emphasis
on expensive constructions necessary to relieve traffic
congestion around large metropolitan areas. The
relative importance of public welfare expenditures in
the D istrict was about the same at the end as at the
beginning of the period.
A few differences in trends in individual Fifth
D istrict States m ay be significant. In M aryland,
interest rose eightfold, from 0.4% to 3.2% , and in
V irgin ia more than tenfold, from 0.1% to 1.1%. In
North Carolina, by contrast, it declined from 1.3%
to 0.9% as that State reduced its debt. The share
going to education was unusually high in North Caro­
lina, where the State government carries the basic re­
sponsibility for public schools; the figure rose from



H ighw ays

Public W elfare

All O ther

Fifth District States

H igh w ays

All O ther




Per Cent of Total

40.8% in 1950 to 45.2% in 1962. Because of w ide­
spread unemployment, W est V irgin ia devoted a large
and rising proportion of its expenditures to public
w elfare— 14.8% in 1950 and 19.0% in 1962.
Conclusion G eneral ex p en d itu res of the S ta te s
have in recent years risen steadily and more rapidly
than GNP, personal income, or expenditures of the
Federal Government. On any basis of m easure­
ment, amounts of and changes in expenditures have
varied w idely between States. Both on a per capita
basis and in relation to personal income the higher
figures are often found in the relatively sparsely
settled States. On a per capita basis, expenditures
of Fifth District States are close to the national
averages, but in relation to personal income they have
consistently been above those averages. In almost
all States education, highw ays, and public welfare
account for a very large m ajo rity of State expendi­
tures. Fifth D istrict States consistently spend a
larger part of their funds for education than do the
other States as a group.




The C h esap eak e Bay bridge-tunnel system, long a dream of m any Tide­
w ate r V irg in ian s, becam e a reality last month. This engineering m arvel
connects V irgin ia's Tidew ater are a with the D elm arva peninsula and provides
continuous ro a d w ay along U. S. Route 13.
The direct cost of the bridge-tunnel w a s ap p ro xim ately $14 0,0 0 0 ,0 0 0 .
C apitalizatio n of interest and other related costs added substantial am ounts,
so that the total cost approxim ated $ 2 1 0,0 00,000.
It w as financed through
revenue bonds w hich are expected to be serviced and retired from toll receipts.
Business observers in Eastern V irg in ia expect the new facility to prove a
boon to the economic prospects of the D elm arva peninsula.
The economy of
this a re a , hitherto linked with the V irg in ia Tidew ater section only by ferry, has
long been p rim arily agricultural.
The project has a lre ad y led to the estab­
lishment of one industrial firm —a com pany set up to precast concrete products
for the bridge-tunnel. This firm w ill continue in operation and w ill em ploy
up to 200 persons in peak seasons.
Increasing motor traffic through the
peninsula is expected to stim ulate developm ent of the area's substantial tourist

One of the nel sections prefabricated in Texas
is towed i >rfolk to be prepared for sinking
at the tunr •

The completed tw o-lane bridge-tunnel, called one of the engineering w onders of the modern w orld,
requires 20 to 30 minutes traveling time. Tolls are $4 for a car and driver and range from $7 to
$16 for trucks.
Fishing facilities w ill open on one island in June.

In recent years, most notably since 1955, there has
been an im pressive revival in the use of bankers’ ac­
ceptances in financing foreign trade. T his recent
growth ends a long period, running from the early
1930’s through W orld W ar II, during which the
outstanding volume of acceptances denominated in
dollars fell from $1.7 billion in 1929 to $110 million
in 1944. In spite of their recent growth in this coun­
try, bankers’ acceptances are still probably the least
fam iliar of all money m arket instruments.
W h at is a Bankers’ Acceptance? B a n k e rs’ a c ­
ceptances represent one type of a broad class of credit
instruments known as bills of exchange. B ills of
exchange, in turn, are drafts, or orders to pay spe­
cified amounts at a specified time, drawn on indi­
viduals, business firms, or financial institutions.
W hen the drawee form ally acknowledges his obliga­
tion to honor such a draft—usually by w ritin g “A c­
cepted” or “ I Accept” w ith the appropriate signature
across the face of the draft—it becomes an “ac­
ceptance.” An acceptance which represents the lia­
bility of a well-known bank is, for obvious reasons,
a more reliable credit instrum ent than one drawn on
a little-known firm or individual.
Acceptances have legal status as negotiable instru­
ments which the payee or holder in due course m ay
discount in the money m arket. O rdinarily banks
“open acceptance credits,” or accept drafts, on behalf
of their customers, usually under letters of credit. A
customer on whose behalf a draft is accepted is obli­
gated to provide the bank with funds for payment
on or before the m aturity date. L egally, both the
draw er, who endorses the acceptance when he sells
it, and the accepting bank are obligors of the draft and
this makes acceptances an example of what is known
in money m arket parlance as “two-name paper.” The
resulting high degree of safety renders the acceptance
an attractive short-term investment.
Acceptance Financing B a n k e r s ’ accep tan ces
typically arise from letters of credit in foreign trade
transactions. For exam ple, a domestic concern w ish­
ing to import goods from abroad m ay request its
bank to issue a letter of credit on its behalf in favor
of the foreign seller. If the bank finds the custom er’s
credit standing satisfactory, it w ill issue such a letter,
authorizing the foreign seller to draw a draft upon
it in payment for the goods. Equipped with this
authorization, the exporter, on shipping the goods,

can discount the draft with his bank, thereby re­
ceiving payment immediately. The foreign bank, in
turn, forwards the draft, with appropriate shipping
documents, to its correspondent bank in this country
with instructions respecting its disposition. Gen­
erally the U . S. correspondent bank w ill present the
draft for acceptance at the drawee bank, which for­
wards the shipping documents to the importer, who
now m ay claim the shipment. The correspondent
bank m ay be instructed to hold the acceptance until
m aturity as an investment for the foreign bank. Or it
may be instructed to offer the acceptance for sale in
the m arket and credit the deposit account of the
foreign bank. In any event, the ultim ate holder of
the acceptance is the party actually financing the
The accepting bank m ay, of course, buy the ac­
ceptance which it originated. In such a case, it earns
the difference between the purchase price and the
face amount which must be reim bursed by the cus­
tomer in whose behalf the acceptance credit was
opened. It also earns the commission charged for
the letter of credit. W hen the bank follows such a
course it is actually financing the transaction and its
position is much the same as when it extends a loan
directly to the customer. On the other hand, if some
other party buys and holds the acceptance, the o rigi­
nating bank has tied up no funds. It has m erely
lent the prestige of its name, assum ing a contingent
liability, for which it collects a small fee.
W hile individual banks often acquire acceptances
drawn on themselves, m any prefer to hold instru­
ments drawn on other banks. The latter instru­
ments offer some advantages, especially with respect
to m arketability. W hen sold, under endorsement,
they become three-name p ap e r; that is, they carry the
name of three obligors—the draw er and two banks.
Three-nam e paper is especially attractive to foreign
investors, some of whom purchase only this type. It
is not uncommon for accepting banks to sell to dealers
their acquisitions of acceptances drawn on themselves
and to replace these in their portfolios with instru­
ments drawn on other banks. Such a practice is
known in m arket term inology as “sw aps.”
Acceptance Terms M a tu ritie s on b a n k e rs’ ac­
ceptances range from 30 to 180 days, but 90 days is
most common. M aturities can often be tailored to
cover the entire period needed to ship and dispose

of the goods financed. A s regards both liquidity and
safety, bankers’ acceptances are almost as attractive
as T reasury bills. T his is reflected in the relatively
low m arket yields on acceptances, which generally
run only fractionally higher than T reasury bill yields.
M arket yields, however, do not present a true
picture of the costs of acceptance financing to the
borrower, since the accepting bank levies fees for this
service. Banks custom arily charge a minimum of
\l 2°/ per annum, or
/ o
of 1% per month, for ac­
cepting a draft on behalf of nonbank customers of
the highest credit rating. Less creditworthy cus­
tomers pay higher fees, w hile charges are somewhat
lower wT
hen the acceptance is in behalf of a foreign
bank. The cost to the borrower, therefore, is equal
to the fee plus the discount on the acceptance. In
some cases the discount is absorbed directly, as in
the case of the foreign bank which draws a draft on
a U nited States bank in order to create dollar ex­
change. In others, the discount is absorbed indi­
rectly. For exam ple, in a trade transaction the e x ­
porter ostensibly pays the discount, but this is gen­
erally passed on to the importer (borrow er) in the
form of a higher cost for the goods.
H istory T h e h isto ry of accep tan ces in E urope
dates back to the pre-modern period. Europeans
have confidently used these instruments for years

and in many instances prefer them to other liquid
investments. In this country, however, they have
not been so popular, although they wT w idely used
in the period before the Civil W ar. W hen the F ed­
eral Reserve System was established in 1914, only
a few private banks and other nonbank institutions
engaged in acceptance financing.
In its early years, the Federal R eserve undertook
to promote the development of an acceptance m arket
and to this end stood ready to buy bankers’ accept­
ances at quoted prices. From 1915 through 1934
the Federal Reserve Banks were fairly active buyers,
but from 1934 to 1955, purchases were made only oc­
casionally. D uring the latter period their buying
rates were set so high relative to m arket rates that
they w ere offered few acceptances. Prior to 1955, the
Federal Reserve Banks did not sell acceptances from
their own account but held all they purchased to
m aturity. In their role as agents for foreign central
banks, however, they operated on both sides of the
m arket.
P artly in response to Federal Reserve efforts, the
acceptance m arket grew steadily until 1929. M em­
ber banks and private concerns created an increasing
number of acceptances, and except for a slight setbank in the 1920-21 recession, the volume soared to
a peak of $1.7 billion in 1929. T his auspicious be­
ginning was swamped, however, in the depression of

the 1930’s and the 1929 figure was not equaled again
until late 1960.
In 1955 the F ederal Reserve Banks were au­
thorized to buy and sell acceptances for their own ac­
count in the hope that Reserve B anks’ participation
would strengthen and broaden the m arket. A t the
end of that year, the volume of acceptances outstand­
ing was approxim ately $642 million. It has moved
up rapidly since that time and in December 1963
stood at around $2.9 billion.
Recent Uses In th is co u n try, m ost accep tan ces
have arisen in the import and export business. In
recent years acceptances have found grow ing use in
the financing of goods stored in or shipped between
foreign countries. Between 1955 and the end of
1963, for exam ple, acceptances arisin g from this
source increased more than tenfold, and the total of
these now outstanding almost equals the amount
based on imports and exports. Acceptances arising
from the extension of dollar credits to foreign banks
account for only a sm all percentage of the total
volume outstanding currently but, as the accompany­
ing chart shows, the demand for such acceptance
credit grew very substantially from 1955 through
1962. T his type of financing is especially attractive
to foreign central banks in countries whose exports
to the U .S . are highly seasonal. Through the dollar
exchange acceptance, those banks seek to provide
themselves with dollars to finance their custom ers’
imports during seasons when export earnings are low
and dollars are in short supply. In later months,
when exports expand, the acceptances are paid off.
The Acceptance M arket D espite its recent
growth, the m arket for bankers’ acceptances remains
far less extensive than that for T reasury bills or com­
m ercial paper. The most active institutions in the
m arket are foreign banks and financial institutions,
the Federal Reserve Banks (especially the New York
B an k ), a relatively sm all group of large city banks,
and a sm all group of nonbank dealers. Recently,
however, private domestic investors have become in­
creasingly interested in acceptances.
There are only about five dealers in the bankers’
acceptance m arket, and the m ajority of these deal
p rim arily in U nited States Government securities
and only incidentally in acceptances. Dealers make
a m arket for acceptances by their w illingness to buy
and sell on a continuous basis at preannounced rates,
which are adjusted frequently in response to money
m arket forces. They earn their profits through the
Digitized for10

spread between buying and selling rates, currently
of 1% per year, and are consequently most in­
terested in m axim izing the volume handled. “ Sw aps”
by accepting banks account for a large part of dealers’
volume. Dealers inventories are usually held at low
levels and in times of brisk demand only a small
volume of acceptances is available to nonbank in­
Acceptance Investors F o reign b a n k in g and non­
bank institutions are the most important investor
group in the m arket. These have traditionally re­
garded bankers’ acceptances as highly safe and liquid
short-term investments. Foreign holders’ income
from acceptances is not subject to the Federal income
tax and because of this, foreign holders realize a
higher net yield from acceptances than from T reasury
bills, although in some countries this advantage is
elim inated through reciprocal tax treaties with the
U nited States.
The next most important investor group is the
accepting banks themselves. In December 1963
these banks held 45% of the total outstanding, and
about 80% of their holdings consisted of acceptances
drawn on themselves.
From the standpoint of banks, acceptances have
an important advantage over direct loans. A c­
ceptance financing of custom ers’ credit demands need
not involve a charge on the bank’s cash reserves,
since the bank, as noted earlier, m ay only be lending
its own credit. M oreover, bankers’ acceptances are
a better “secondary reserve” than customer loans.
Bankers experiencing reserve losses can readily cover
these through the sale of acceptances to dealers
w hereas liquidation or rediscounting of customer
loans would probably involve greater inconvenience,
higher costs, and poor customer relations. On the
other hand, bankers’ acceptances are complex, require
more paper work, and only the larger banks have the
name and foreign connections required for success
in acceptance financing.
Other investors include nonbank corporations as
well as commercial banks which are not engaged in
acceptance financing as such. A ctivity by this group
depends in large part upon the relationship of ac­
ceptance yields to those of other short-term invest­
ments. L ack of complete understanding of the m arket
and the odd-lot denominations of acceptances, how­
ever, deter m any nonbank investors. Moreover, this
group frequently experiences difficulty in finding ac­
ceptances to purchase.


O perating statements of Fifth D istrict member
banks for calendar year 1963 indicate a continuation
of the trend toward higher costs and reflect efforts
on the part of bankers to offset rising costs by shifting
into higher-yield assets. These developments are re­
flected in significant shifts in the relative importance
of various expense items as well as in sources of
earnings. R atios employed to detail these results in
the paragraphs that follow are simple averages of
individual bank ratios.
Total operating income of Fifth D istrict member
banks moved up in 1963, but total operating expenses
increased at an even faster rate. A s a result, net
operating earnings before taxes declined from 28.1%
of total operating income in 1962 to 27.6% in 1963.
This ratio stood at 37.5% as recently as 1952 and has

moved downward with few interruptions since that
Sources of Earnings In te re st on loans accounted
for 65.5% of total operating income in 1963, a
new high for the postwar period. The increased
importance of loans as a source of income was partly
the result of continued growth in loans relative to
total assets. In addition, however, the average rate
of return on loans was higher, as real estate and con­
sumer loans gained in relative importance.
The proportion of total assets held in the form of
municipal and corporate securities rose again last
year, and the average yield on these assets w as also
somewhat higher. Although income from m unici­
pals and corporates accounted for only 5.8% of total
current operating income, its importance in terms of
net income after taxes w as much greater than this
ratio would indicate.
Income sources which declined in relative impor­
tance in 1963 included interest on U . S. Govern­
ment securities and service charges on deposit ac­
counts. Although the average yield on Government
securities portfolios last year was 3.48% , compared
with 3.33% in 1962, income from Governments com­
prised a sm aller portion of total operating income as
the ratio of Governments to total assets continued the
decline that has been evident for some years. The
ratio of service charges to total operating income has
drifted slowly downward since 1958, and service
charges contributed but 4.6% of current operating
income last year.
Operating Expenses In te re st on tim e and s a v ­
ings deposits has been the fastest grow ing category
of operating expense in recent years. These p ay­
ments, which increased 20.2% in dollar volume in
1963, absorbed 26.7% of current operating income
in that year, compared with 25.8% in 1962. The in­
crease resulted from a substantial growth in time and
savings deposits and from a rise in average interest
rates from 2.96% to 3.10% .
The share of current operating income needed to
meet w age and salary payments was sm aller than in
1962. V arious officer and employee benefits, how­
ever, absorbed a slightly larger percentage of current
income than in the preceding year.


Per Cent
+ 6.0 -

1st. Qtr. 1962
+ 4.0

1st. Qtr. 1963
1st. Qtr. 1964

+ 2.0



- 4 .0





Loans and



Time and

Return to Owners T he u ltim ate m easu re of op­
erating performance is, of course, the return on
owners’ equity. In 1963, D istrict member banks’ net
current operating earnings before income taxes
amounted to 14.4% of total capital accounts, a
modest improvement over the preceding year. After
adjustm ents for profits on sales of securities, losses
on loans, and increases in valuation reserves, net in­
come before taxes was down fractionally from the
1962 level. T axes on income were also somewhat
lower, however, and net income after taxes w as un­
changed from the preceding year at 8.4% of total
capital accounts. Although this return did not rep­
resent an improvement over the 1962 figure, it was
exceeded in only two of the last ten years.
The average D istrict member bank declared cash
dividends equal to 41.2% of realized net income,
down from 43.0% the year before. T his ratio has dis­
played a considerable degree of instability in recent
years, ranging, for exam ple, from 48.3% in 1959 to
37.5% in 1960. In contrast, the ratio of cash divi­
dends to total net wT
orth has fluctuated between 2.9%
and 3.2% over the last decade. The figure was
3.1% in 1963.
Banking in the F irst Q uarter T o tal cred it at
D istrict member banks registered a sm all increase in
the first quarter of 1964 as compared with substantial
seasonal reductions in comparable periods of the last
Digitized for 12

two years. The 1.3% grow th in loans w as the
largest first quarter expansion since 1959, and
wrhile the decline in total investments w as greater
than in 1961 and 1962, it w as less than in sim ilar
periods of other years in the last decade.
Information is not yet available as to changes in
individual loan categories for all D istrict member
banks, but data for those large banks which report
such information w eekly m ay indicate the general
nature of the changes. For these banks, business
loans and all other (p rim arily consum er) loans e x ­
panded at a faster rate than in any first quarter since
1961. R eal estate loans grew at a record pace
through the week ending M arch 11, but since that
date have shown little increase. N evertheless, their
growth rate for the entire first quarter was greater
than in the sim ilar period of any recent year.
Total investments declined less than in the first
quarter of 1963, m ainly because of an unusually
large expansion in holdings of securities other than
U. S. Governments. H oldings of such securities,
m ainly obligations of states and political subdivisions,
have grown steadily in recent years. A s of A pril 1,
1964, they accounted for 32.5% of total investments
of the w eekly reporting member banks as compared
with 22.5% twT years earlier.
Holdings of U. S. Government securities by D is­
trict w eekly reporting banks dropped substantially in
1963 and declined further in the first quarter of
1964. The lengthening of the average m aturity of
Government portfolios, which has been evident for
several years, appears to have slowed in the most
recent quarter. Governments with less than one
year to m aturity accounted for a slightly larger per­
centage of total investments in the first quarter of
1964 than they did in the final quarter of 1963, while
those with more than five years to m aturity rep­
resented a sm aller fraction of the investment portfolio.
Demand deposits, after falling sharply in Jan u ary,
recovered somewhat thereafter and the decline for
the first quarter w as about seasonal. In contrast,
total time deposits grew at a record rate in Jan u ary
but increased at a slower pace in F ebruary and
M arch. Consequently, growth in tim e and savings
deposits for the first quarter was somewhat below
that in sim ilar periods of the last two years.

C o ver—University
Departm ent






of H igh w ays;
W e lfare ;


W est

C aro lin a ;

V irg in ia

& 7. C hesap e ake



C aro lina


C aro lina

Departm ent

M edical

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102